By Leon Gettler
For the non-accountant, accounting is a completely different universe, one where you have to be across accounting concepts and terminology, all the principles of the double entry system and accruals, analysis and interpretation of financial statements and depreciation of capital assets where a company allocates an asset’s cost over the duration of its useful life.
Each time a company prepares its financial statements, it records a depreciation expense allocating a portion of the cost of the buildings, machines or equipment it has purchased to the current fiscal year. Then there are statutory requirements, like GST, and preparing budget reports.
Does that sound too technical? Better get your head around it. Understanding accounting gives managers a better understanding of how their organisation works. They end up with better control and confidence over their budgets and careers.
Mind Tools gives managers a complete run down of book keeping, balance sheets, income, or profit-and-loss (otherwise known as P&L) statements and cash flow statements. It tells you all about what to expect in them, and what not to expect (for example, net income in an income statement does not necessarily mean cash. Revenues and expenses are recorded at the time of occurrence, not when cash changes hands. Nor does it take into account depreciation).
It makes the point that managers can’t afford not to understand basic accounting.
“Financial management is a crucial aspect of any thriving business. Profit maximisation, or stockholder wealth maximisation, are two real concerns for any organisation – and they depend on solid financial decisions. To make good decisions, management needs good information. And that information comes from the accounting system.
“Financial statements contain important information about your company’s operating results and financial position. The relationship between certain items of financial data can be used to identify areas where your firm excels and, more importantly, where there are opportunities for improvement. Using, understanding, and interpreting these statements will help you make much better business decisions.”
Sheila Shanker at the Houston Chronicle recommends several steps. First, watch the cash position carefully. If the company has only $50,000 cash in the bank and has to buy a $120,000 piece of equipment, managers will have to organise another way of financing it. Secondly, always compare the budget figures to what’s actually being spent. Managers can research the reason why costs are higher than budgets and make decisions about that. If actual versus budget reports show a trend towards more expensive inventory costs, then managers may consider renegotiating terms or prices or even changing suppliers. They need to be right across who owes the company money and for how long.
Managers should also get their heads around the difference between cash based accounting and accrual accounting. Cash based accounting is where companies record expenses in financial accounts when the cash is actually laid out and accrual accounting is where the company records revenue when the actual transaction is completed, even if the customer hasn’t paid the bill yet.